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    How should AFC determine its pricing strategy when customers are concerned mostly about price?

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    Management accounting is guided by the Institute of Management Accountants (IMA). The IMA has issued a statement entitled Standards of Ethical Conduct for Management Accountants. The following are the main components of this statement: competence, confidentiality, integrity, and objectivity.

    Using the Library and other course resources, comment on how these standards should be applied by AFC to address the following issues:

    outsourcing
    price structure
    cost structure
    bonus structure
    general profitability
    human resources
    company valuation

    The scenario:
    Allen Frame Company (AFC) is a privately owned family corporation that designs and manufactures picture frames for artist and retail stores. AFC also provides a custom framing service to individual artists. AFC began two years ago when the Allen family acquired a bank loan for $100,000. AFC has grown to $800,000 in sales for 2005. $700,000 of its sales came from the manufacturing of picture frames, and $100,000 in sales were from the custom framing service it provides to individual artists. AFC sees its manufacturing business growing rapidly over the next three years.

    Click here to view accounting and operational activity that has occurred over the first two years of operation.

    Assume that all transactions were cash transactions except for adjusting entries for depreciation.

    In 2004, AFC manufactured 17,000 picture frames and sold 15,000 picture frames. It completed and sold 1,000 custom framings for artist customers.

    In 2005, AFC manufactured 23,000 picture frames and sold 20,000 picture frames. It completed and sold 1,000 customer framings for artist customers.

    The AFC management team feels it can increase framing production by 25% without increasing fixed costs. AFC, however, would like to double its revenue over the next two years. This will require a $75,000 increase in its fixed costs for the addition of manufacturing space, equipment, and salaries.

    Some of the issues that will confront management during this growth period is maintaining the level of expertise in the design and manufacturing areas and developing the level of competence to control a family business of this size.

    Management is also concerned about growing its profitability to become a publicly traded corporation within the next five years, pay a reasonable bonus to key management, and maintain its ability to pay a competitive wage and salary (when compared to the industry standards). These concerns focus AFC's responsibility to its current customers and its current family share holders and will influence how AFC classifies these costs by recording them as assets or expenses. Additional concerns include the following:

    Should AFC purchase/build a manufacturing facility or continue to pay rent?
    Should AFC consider outsourcing some of its manufactured products, and if so, will it maintain a competitive cost structure to price its frames at a competitive level?
    How should AFC determine its pricing strategy when customers are concerned mostly about price?

    You report to Jon Allen, the president and owner of AFC, as the corporate controller. You have been asked to evaluate the first two years' performance and research the possible problems AFC may encounter during this growth period.

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